Contracts are everywhere. It seems daily I am asked to “sign this” or “review these terms.” But, what does it all mean and are all these contracts necessary?
Are Contracts Needed?
The short answer is yes, contracts are necessary. In fact, they are one of the hallmarks of a well-established society and help bring stability to business dealings and social interactions. Nearly 15 years ago, I had the opportunity to spend two years in Kenya, Africa. Kenya is not only one of the poorest places on earth, but it is also a place where contacts are few and far between. In Kenya, as is the case throughout most of the developing world, the lack of social and business contracts make life too unpredictable. Societies without enforceable contract laws do not honor terms of agreements, time and dates for performance, payment, or guarantee the quality of products.
While contracts can seem burdensome at times, they represent fairness and stability. Contracts also help prevent larger, more costly problems. The cost of litigation is extraordinary high and can take years to resolve. Successful businesses do not waste unnecessary time and energy fighting over preventative problems. Well-drafted contracts can help prevent many problems.
Below is a brief discussion of some of the important concepts every business owner in South Carolina should know about the law of Contracts.
What’s a Contract?
An agreement between two or more people in which something of value is exchanged is a contract . Usually one person agrees to perform a service or deliver a good in exchange for valuable consideration, such as money. Some of the more prevalent business contracts in South Carolina include buy/ sell agreements, bill of sales agreements, contracts for services, employment and non-compete contracts, real estate transactions and lease agreements, licensing agreements, and loan agreements.[i]
Creating an enforceable contract begins with a meeting of the minds regarding the agreement. Next, contracts require 1) an offer, 2) an acceptance, and 3) consideration.[ii]
An offer is a written or oral expression by one party to another to buy, sell, or do something. I can offer to buy a house, or sell my car, or provide legal services to a client. In order to prove a “meeting of the minds” or agreement, the offer must be accepted by another party who agrees to the terms of the offer – or at least wants to come to an understanding or counteroffer. But, having an offer and acceptance does not create a contract, there must be consideration.
Consideration is required to create a contract. It represents a promise made by each party to give something in return for some benefit sufficient to justify the promise. If I promise to provide legal services and a client agrees to accept those services in exchange for payment for my services, the money is the consideration upon which the contract hinges. If a party buys my car from me, I give them the title to my car and in return I am paid money. Each party has given something of value, which is the consideration.
Do Contracts Have to Be in Writing?
Contracts often do not have to be in writing, but if the terms of an agreement are significant enough to warrant a detailed agreement, then placing the terms in writing is a good idea.
There are many reasons people fail to get the terms of an agreement down on paper. Some people think it slows the pace of business or think it is unnecessary. Others think it is insulting to imply the other party may not do what they say. The truth is people make mistakes and from time to time misunderstand verbal agreements. Of course, there are also those people who are constantly trying to take advantage of others. Regardless of who is on the other side of a transaction, it is prudent to have him or her sign a contract. If it is awkward to ask the other party to sign a contract, you can always point the finger at company policy or your lawyer for wanting everything in writing.
It is surprising how many business owners enter into handshake deals and fail to put the terms of an agreement in writing. In Charleston, deals are made everyday without the proper contracts in place. For example, weddings and events are a large part of the local economy. Every event requires a plethora of service contracts and vendor agreements, but too often companies fail to put these basic business contracts in writing and end up in trouble. Contractors are another group of highly qualified business owners who ofter fail to reduce agreements to writing.
Additional Concepts in Contract Law
Certainty – The parties to a contract must be able to ascertain the promises contained in the contract or agreement. If a contract is too vague, then it is impossible to determine the terms of the agreement and enforcement is difficult.
Competence – Competence is another issue facing parties to a contract. In order to enter an agreement each party must be competent to enter the contract. Minors and the insane, for instance, are not able to enter into binding contracts.
Unilateral or Bilateral – Contracts in South Carolina can be unilateral or bilateral contracts. A unilateral contract contains a promise in the offer. For instance, if I offer a handyman $1,000 to build a shed, his building the shed is the acceptance. On the other hand, many contracts are bilateral in nature because both parties make promises to one another. If I make an offer to a handyman to build a deck and he says “I’ll build it for $1,000” in the next two weeks, and I tell him to do it, then we have a bilateral contract.
Performance – A party to a contract is required to perform as to the terms of the contract. For example, if I contract a handyman to build a deck, I expect him to complete the job and then I will pay him. If he fails to fully perform according to the details of our agreement, then I can either refuse payment or sue him for breaching the contract. The concept of substantial performance comes into play when a party performs, but does not finish the job or it is slightly different than the agreed product. In that instance, I can sue the handyman for breach of contract to recover the difference between what was agreed and what was done.
Assignments – Often, contracts contain an assignment clause. An assignment occurs when one party to an existing contract passes off the contract’s obligations and benefits to another party. Generally, the party passing off the contractual obligations notifies all parties to the contract. For instance, if I contract with a handyman to build a deck and he assigns the contract to his apprentice after giving me notice.
Statute of Frauds – The Statute of Frauds requires some agreements and contracts to be in writing and signed by the parties to the contract. The South Carolina legislature enumerated those situations requiring a writing as follows: “(1) To charge any executor or administrator upon any special promise to answer damages out of his own estate; (2) To charge the defendant upon any special promise to answer for the debt, default or miscarriage of another person; (3) To charge any person upon any agreement made upon consideration of marriage; (4) To charge any person upon any contract or sale of lands, tenements or hereditaments or any interest in or concerning them; or (5) To charge any person upon any agreement that is not to be performed within the space of one year from the making thereof.”[iii]
Parole Evidence Rule – Under the parole evidence rule, “where the terms of a written instrument are unambiguous, clear and explicit, extrinsic evidence of statements made contemporaneously with or prior to its execution are inadmissible to contradict, vary or explain its terms.” Under some circumstances, extrinsic evidence is warranted due to ambiguity of the contractual terms found in the writing.[iv]
Breach of Contract and Other Remedies
When an agreement between parties erupts into a dispute, there are a number of remedies. In some cases, the injured party can procure a court order asking the court to cancel the contract or put in place an injunction. Another remedy is asking a court to compel specific performance or have the contract modified. Many times, a breach of contract action is required to remedy the situation.
If one or both parties is in breach of contract, then one or the other will institute legal proceeding to attempt to recover losses. Most of the time, a breach of contract action is remedied by money damages. The value of the damages is the total loss, not just recovery for the agreed price of the contract. In order to bring a breach of contracts action, the plaintiff must prove the following: 1) The existence of a binding contract, 2) breach of unjustifiable failure to perform the contract, and 3) damages suffered by the plaintiff.[v]
Tips For Drafting Business Contracts
The most important consideration when drafting a business contract is making sure you understand the terms of the agreement. Contracts are pointless unless both parties understand who is agreeing to what. The following is a list of 12 Tips for Drafting Business Contracts.
- Understand the terms of the agreement.
- Put the agreement in writing.
- Make the agreement readable.
- Spell out payment and pricing details.
- Articulate the services or products to be rendered.
- Highlight when performance is expected.
- Communicate representations or warranties made about the services or products.
- Consider limitations on liability if the other party does not think the services or products meet expectations.
- Think about including a clause relieving you from breach if unforeseen circumstances arise.
- Include language defining how disputes will be resolved.
- Define how the contract will be terminated.
- Consider a confidentiality agreement.
People misunderstand terms of agreements or think they have communicated well everyday. Life happens and having well documented terms of an agreement down on paper helps everyone understand what is expected.
Contracts and documents may seem burdensome and even boring, but they are important. The success of your business depends on taking the necessary steps to make sure your contracts are designed with your business in mind.
John Henderson is a corporate lawyer with Henderson & Henderson law firm in Charleston SC. He focuses on startup companies and other areas of corporate law. For questions, please contact him or call 843-212-3188.
[i] Black’s Law Dictionary (9th ed. 2009).
[ii] Restatement (Second) of Contracts (1981).
[iii] SC Code Ann. 32-3-10.
[iv] Ray v. South Carolina Nat’l. Bank, 281 S.C. 170, 314 S.E.2d 359 (1984).
[v] Elements of Civil Causes of Action, Fourth Edition. Michael G. Sullivan and Douglas S. MacGregor. South Carolina Bar.